Mumbai: The rupee climbed towards a recent seven-year high on Tuesday in the first trading session since the central bank raised rates, as dealers sold dollars to take advantage of elevated cash rates in the money market.
The rupee was not quoted on Monday, as banks stayed away from the market to make final settlements for the financial year that ended on 31 March, and Tuesday was the first time dealers had a chance to react to an unexpected rate rise late on Friday.
By 10:05 am, the rupee was at 43.24/25 per dollar, according to Reuters data, not far off a seven-year high of 43.01 set on 28 March.
It ended at 43.45/48 per dollar on Friday, after falling 1.7% on Thursday on suspected central bank intervention. “The market believes there’s money to be made going short (on dollars), but by raising the CRR (cash reserve ratio), the RBI has given itself room to intervene, which will keep traders on their toes,” said a dealer at a private bank, referring to the Reserve Bank of India.
The RBI is suspected of selling rupees regularly since November, in a bid to stem its rise.
The central bank intervenes to preserve exporters’ competitiveness and smoothe volatility, analysts say.
After the market closed on Friday the central bank lifted its repo rate to 7.75% and also increased the cash reserve ratio, the proportion of cash banks have to keep with it on deposit, by half a percentage point to 6.5%.
Overnight cash rates were trading at 11% to 13% on Tuesday, down from 80% hit on Friday, their highest level in more than a decade, but still above 6% to 7% when cash supplies are adequate.
Traders said they would watch the stock market closely for clues about the rupee’s direction. Shares fell 4.7 percent on Monday to their lowest close in two weeks, sparking concerns that foreign investors would pare their positions in equities.
However the main index was 1% up in early deals on Tuesday.
Portfolio-related capital inflows have helped the rupee gain about 8.5% since hitting a three-year trough last July.